Sunday, August 14, 2011

Using Field Experiments To Diagnose the Causes of Our Economic Malaise

Have you noticed that economists do not agree about what are the causes and cures for our current malaise?   Right now we seek to reduce the budget deficit and to reduce unemployment.   If more people worked and paid taxes, then unemployment insurance claims would be lower and the IRS would collect more tax revenue, so it appears that job growth would address both of these issues.  

Firms hire workers when the marginal value product is greater than the wage they must pay.  During this time of macroeconomic uncertainty and uncertainty among academic economists concerning what is the disease and what is the correct medicine to order, I suggest that it is time to experiment and follow the advice of Banerjee and Duflo.

To quote these authors;  "Perhaps even more importantly, they are often in a position to midwife the process of policy discovery, based on the interplay of theory and experimental research. It is this process of “creative experimentation”, where policymakers and researchers work together to think out of the box and learn from
successes and failures, that is the most valuable contribution of the recent surge in experimental work in economics."

So, permit me to propose some randomized experiments;

Experiment #1;   Take the counties in the United States where unemployment is over 11% right now and randomly assign them to treatment and control.  In the treatment counties, allow any employer in these counties to be exempt from minimum wage laws and from unionization rules for 24 months.   In this experiment, the job creation in these counties will be compared to the control counties in a simple "before/after" comparison.  In the control counties, make no changes to existing labor regulations.

Experiment #2;   For the same subset of high unemployment counties, randomly assign counties to "health insurance" categories.  For firms that locate in counties assigned to the "treatment group", these firms will have to pay for no health care insurance for workers they hire. Instead, the government will provide health care offering Medicare coverage for the hired workers.

These experiments will help to settle the issue of whether labor market compensation is reducing job creation. If firms in the treated counties under experiment #1 and #2 continue to refuse to hire workers, then this is strong evidence that U.S workers lack the skills to be competitive in this global economy and we face a long run problem.

1 comment :

Francisco Arceo said...

I think that's a fairly good idea but I don't think this would hit completely at the heart of the problem. I don't think risks for health insurance expenses and unions are what are keeping unemployment low. I think this might be an "aggregate demand" problem. Consider this, say whatever arbitrary company one might consider does hire more workers when they don't have unions and they don't have worries about health insurance costs to worry about, do you think they'll sell more products? I feel like they probably wouldn't.

I think that we have to keep in mind that corporate profits have never been higher. If that's the case, why aren't they using all of that money for investment or production? Because unemployed people don't have the demand for goods.

Now, I'm only an M.S. student in Economics, so I could be pretty wrong on this, but I figure comments are always appreciated (at least, I love feedback). I think a potentially more interesting study might be to look at the different marginal tax rates actually paid by different corporations from 2001-2009 and how that affected unemployment rates. An easy way to do this would be to find the headquarters of the firms you'd be looking at and using the state unemployment rate the year after they paid the taxes (year paid+1). This would be a nice panel study, but there's probably a large problem: data accessibility. You'd have to convince the IRS to give you that information, and you'd have to track down information about an extremely large amount of firms. It would be pretty tough, but I bet it would be interesting to see whether or not the claims about cutting taxes increasing employment are empirically true--20 bucks says they're not. From there, it's just redistribution of income, right? The government uses the money from corporations to balance the budget without entitlement cuts. Further, they can spend money to increase employment. Or, better yet, they can offer more grants for entrepreneurship--but the AD problem might still exist. I'm not sure if this comment is at all useful, sure hope so. :)